Australian economy showing signs of transition but outlook remains pessimistic

GMT
16:39 2016
Thursday ,25
February

Australia's business

Sydny - Xinhua

Australia's business investment recorded a surprise bounce in the last quarter of 2015 as spending picked up outside the mining sector, however the outlook remains pessimistic among significant global uncertainties despite a strong domestic economy.

The Australian economy is undergoing a significant and difficult transition away from mining-led growth, tailoring services and exports to capitalize on the emergent Asian middle class despite significant global headwinds.

Australia's actual capital expenditure rose by 0.8 percent in the last quarter of 2015 - market expected three percent drop - from a lift in non-mining investment that partially offset falls in the mining sector, according to Australian Bureau of Statistics (ABS) data released on Thursday.

The vexing issue for policy makers however, early investment intentions for the year to June 2017 showed a sharp drop - 20 percent - to 82.6 billion Australian dollars (about 59.3 billion U.S. dolalrs), led by a 35 percent drop in mining capex as large project exit construction and enter the production phase. Non-mining capex rose nine percent.

A 35 percent drop in mining CAPEX led the falls, which was to be expected as large projects exit the construction and enter production phase. Non-mining sector increased nine percent.

"The capex story is not where you would hope to be at this point," RBC capital markets senior economist Su-Lin Ong said.

"It's probably still going to drag heavily on activity in the foreseeable future and it begs the question of what gets growth much stronger."

However, the ABS survey excludes a number of important sectors where drivers of investment tend to be structural, rather than cyclical, such as agriculture, health and education, the main sectors dragging Australia through it's transition where investment is anticipated to be firm, Commonwealth Bank of Australia senior economist Gareth Aird said.

"As such, non mining investment is not expected to be as soft as the survey implies," Aird said.

It also should be noted the fourth quarter capex survey was taken over January and early February when global growth concerns, credit defaults in the energy sector caused equity markets to fall sharply.

"These factors would have weighed on 2016/17 capex plans," Aird said.

"In contrast, over the past two weeks market sentiment has improved and risk assets have had a better time."

Figures due next week are expected to show Australia's economy grew at 0.5 percent in the last quarter of 2015 for an annual growth trend at 2.5 percent, a much faster pace than other developed markets and away from recession fears that surfaced in 2015.

"An economy running at 2.5 percent per annum, with an unemployment rate around six percent per annum, is a comfortable distance from recession," Commonwealth Bank of Australia chief economist Michael Blythe said in a note published Thursday.

However investors are wagering the below-trend growth and global growth headwinds will force the Reserve Bank of Australia to cut the already record low two percent cash policy towards the second half of 2016.

"The reason for a lack of investment goes beyond the level of interest rates and the Australian dollar - these cyclical drivers of business investment are at levels that support, rather than hinder, investment," Aird said.

Aird argued there are range of forces holding business investment back including demand being weak, the government's fiscal policy creating impediments to growth, demands for shareholder dividends and uncertainty surrounding the type of investment needed.